Chinese cafe chain Luckin Coffee has been in all sorts of trouble for quite some time but it seems that the stock is not completely dead just yet. The stock has been making a recovery in recent days and over the course of the past week, the Luckin Coffee Inc – ADR (OTCMKTS:LKNCY) stock has rallied by as much as 80% in the OTC market. On Thursday, the stock rallied further and recorded gains of 13.31%.
The company has been going through difficult times in recent times and its stock crashed after an accounting scam was discovered earlier this year. Luckin Coffee is now trying to shrug off the after-effects of the scandal and trying to make a comeback.
It should be noted that the Luckin stock had been thrown out of NASDAQ after the accounting scandal and it trades on the OTC markets. In addition to that, the company had also received penalties from the Chinese regulatory body Chinese State Administration for Market Regulation.
While the rally in the stock may be somewhat comforting for investors, it cannot be denied that Luckin Coffee’s fall from grace has been swift. Luckin had expanded rapidly in China and due to its affordable offerings proved to be a major challenger to Starbucks.
As a matter of fact, the company was often called ‘the Starbucks of China’. While that may have seemed a bit over the top but there was no denying that Luckin was slowly but surely capturing chunks of the market in China. Back in January this year, the Luckin stock had rallied by as much as 150% in just around 6 months and hit $50.
At the same time, the Starbucks stock had remained flat. However, the accounting scandal proved to be a hammer blow to the company’s aspirations and its stock.
Can It Stage a Comeback?
Luckin primarily depended on heavy promotions and discounts in order to boost its sales. However, it is unlikely that Luckin is going to become profitable simply by raising the prices of its products. Whatever sales it recorded was due to the heavy discounts.
On the other hand, competition from Starbucks is also heating up and the American company has done that replicating Luckin’s strategy of going heavy on digital sales channels.
Luckin aims to be profitable by 2021 and if it has to happen, then there are a lot of factors at play in addition to raising prices. If Donald Trump wins the U.S. Presidential election then it could be a blow to the company due to his hard-line stance of Chinese companies. At this point, the stock may be a bit too risky for comfort.
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